CHICAGO—Real estate markets across the US, Mexico and Canada continued to show improvement in the first half of the year, according to LaSalle Investment Management. The Chicago-based firm just released its Mid-Year Investment Strategy Annual report, and found that all three countries “showed stronger debt availability and liquidity while pricing improved more than LaSalle expected.” And although initial yields and projected returns in all three are near all-time lows, the “spreads to sovereign debt and corporate bonds are well above average.” The researchers also note the volatility in fixed-income and equities markets, but feel “this may be a temporary correction or the start of the “regime change” based on the pullback from QE LaSalle wrote about early this year in its Investment Strategy Annual 2013.”
With interest rates near historic lows, capital markets remained quite healthy during the first five months of the year. Benchmark interest rates hit record lows in the US, resulting in falling borrowing rates, improved debt availability and better borrowing terms. As a result, prices have risen throughout the continent for real estate that can attract favorable debt. “However, the recent rise in Treasury rates has weighed on U.S. REITs, which are down 16% from the May peak and flat year-to-date.” Still, the impact of this should be modest, LaSalle says, and slow, but not reverse, recent increases in real estate values.
Canada's real estate market has already recovered and stabilized and modest recoveries continue in the US and Mexico. The American warehouse sector has been one of the most impressive sectors and “retail returns continue to lead the NCREIF Property Index (NPI), with malls the main drivers."
"For North America, LaSalle's guidance to core investors is overweight recommendations for logistics/warehouses in all three countries and for retail in the U.S. and Canada.” Investors should find large distribution centers in US hubs, Western Canada, and Central Mexico especially attractive.
But even though LaSalle also recommends that investors should mostly stick to “high-quality well-leased buildings in liquid markets,” they also advise trying “greater than normal exposure to higher return (value-add) strategies for the rest of 2013.” For those interested in higher returns, they recommend “office lease-up strategies particularly in the tech and energy sectors, and warehouse development. Falling warehouse yields in hub markets have made development or build-to-core even more attractive. Cap rates and projected returns of secondary assets and markets have become more attractive compared to top-tier markets and assets, but borrowing rates are narrowing.”
“Where we see value for investors today is the logistics sector, paced by the recovery of world trade and the rise of e-commerce,” says William Maher, LaSalle's head of North American research and strategy. “Industrial and warehouse buildings tend to earn higher income returns than office buildings or luxury residential properties. Additionally, we are excited about edge-of-core properties in gateway cities with walkable locations near transit, shopping and restaurants that attract younger firms. 'Walkability' has become a major factor in the success of many of these new urban properties.”
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
